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ICO’s, Bitcoin, and legal money laundering

October 9, 2017

One of the reasons that the Chinese government took an extremely hard stance against ICO’s is to prevent “legal money laundering.”  You have an rich but moderately corrupt Chinese official that wants to move their money to the United States since they figured that they aren’t going to get a promotion in the 19th Party Congress, and so they want to cash out.

Now it turns out that bitcoin, litecoin, and ethereum are terrible ways of doing “legal money laundering” but ICO’s are perfect for them.  So you are the corrupt official and you have USD 50 million in bribes that you want to move overseas.  The trouble with doing it with a standard cryptocurrency is that you have to buy it on the open market.  Once you try to buy USD 50 million on the open market you make a lot of noise.  It turns out that most of the OTC traders will run away from you.  You could try to do something like fund a bitcoin mine, but that leaves a huge paper trail.

It turns out that an ICO is perfect for you.  Because it’s a *new issue*, the people running the ICO can just give you USD 50 million in freshly minted coin, and if you want you can spread that over whatever wallets you want to disguise your tracks.  Now you have a problem since if you are the *only* investor, then you’ll get caught.  But since you have a lot of small investors involved in the ICO, your dirty money is mixed in with clean money from other sources.  So if the police just try to bust your wallet, they may end up raiding a grandmother in Illinois.

The three stages of money laundering are placement, layering, and integration.  It turns out that ICO’s are absolutely perfect for mixing these three layers, and you get around the problems with placement that you have with bitcoin.

Also it turns out that most of the governments of the world are fine with legal money laundering.  As long as you pay your taxes and don’t do anything too bad, they’ll love your money.  If you look at the US laws on money laundering, you’ll find something really funny.  It’s a pain to move money out of the US.  If you move money into the US and you are willing to declare it for the purpose of taxes, then you can do whatever you want as long as the money is not too dirty.   If your money was shooting endangered tigers, then you can’t move it in the US, but if you were an ordinary corrupt official, the US will be glad to take your money and give you citizenship as long as you are willing to pay taxes.  And it turns out that US taxes are pretty low.

Once you realize that the main use case is *legal money laundering* then a lot of things about the ICO world makes sense:

  • What country is most active at promoting ICO’s?  It’s Switzerland
  • What’s the goal of the regulation?  OK, you are a rich dude that puts money into an ICO.  Your big worry is that people will just take the money and run, and so it turns out that most of the regulation is to avoid these sorts of scams.
  • Why has the press not reported on this?  Well it turns out that the press exists more to provide entertainment than anything else.  Bitcoin is used by drug dealers and terrorists is a nice story because it doesn’t interfere with the business of anyone that matters.  On the other hand, if you start running “terrorist and drug dealer” stories about ICO’s, then people that really are using it to move money will get annoyed, and so its not worth the entertainment value.

So what do I think about this?  Well it turns out that there trillions of dollars in the grey economy.  If you can take a fraction of that and pay for computer geeks, and then move the money in a way that the 99% benefits, then I don’t have much of a problem with this.


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